German engineering giant Siemens has ignored some of its own foreign bribery red flags following a major bribery scandal in 2008, according to recently released reports by an independent observer and other confidential documents.
The warnings involved the company’s use of third-party dealers, who often served as intermediaries to bribe foreign officials, according to former company insiders and internal company reviews. Evidence from public records in China suggests that problems with dealers continued during the pandemic and resulted in medical equipment being sold to Chinese public hospitals at significantly inflated prices.
The surveillance reports, which Siemens was forced to commission from 2009 to 2012, stem from a landmark $ 1.6 billion settlement of corruption charges by the US Department of Justice (DOJ) and the Securities and Exchange Commission (SEC) in 2008. During their investigation, US and German authorities discovered more than $ 1 billion in bribes paid to foreign government officials in exchange for business, in which the SEC called a “systematic practice” spanning decades and virtually every region in which Siemens operated, violating the Corrupt Practices Abroad Act (FCPA). Siemens acknowledged the weaknesses of internal controls and record keeping.
This story was provided to The Associated Press by 100Reporters, a nonprofit news organization based in Washington, DC.
The nonprofit news organization 100Reporters, represented by the law firm Davis Wright Tremaine, sued the Justice Department for the publication of surveillance reports under the Freedom of Information Act. The DOJ, Siemens and its independent auditor, former German finance minister Theo Waigel, have all fought to keep the contents of the audit reports secret, and despite the court-ordered release, much of the material remains obscured by heavy writing.
Waigel declined to comment, saying he did not remember the details of his surveillance. Nonetheless, Waigel has since gained a reputation in Germany as a compliance troubleshooter for large international companies, in part because of his oversight at Siemens.
In a statement, Siemens said the company has “a comprehensive global compliance program designed to prevent, identify and eliminate corruption” and that it “is making significant efforts to identify and eliminate business practices that promote corruption. (in China). This includes ending the use of business partners and consultants in the event of misconduct. “
The appointment of Waigel, a highly regarded figure in the German government and business community, reflected the importance of Siemens’ reputation and global affairs to the German political establishment.
RED SHEETS: OPTIONAL ATTENTION
Evidence from a lucrative industry, selling healthcare equipment in China, suggests that even during Waigel’s four years of monitoring and rebuilding the company’s reputation, Siemens was intentionally relaxing the rules where it could. .
In his initial report, Waigel made 114 recommendations for changes in Siemens compliance practices to prevent corruption. The court authorized the Justice Department to remove all of these recommendations in the current statement, but former Siemens employee Meng-Lin Liu revealed a key issue: a review of the company’s internal controls to examine partners commercial, in particular the use of resellers. or distributors in contracts that would otherwise be dealt with directly between Siemens and the purchaser.
Alleged bribery by third-party resellers to advance Siemens business interests was a core element of the SEC’s criminal complaint against Siemens in 2008, and an issue that would continue to haunt Siemens, sparking subsequent investigations in Brazil and China. . The problem was not unique to Siemens. According to a 2014 briefing from law firm Clifford Chance, more than 90 percent of all FCPA lawsuits in China involve such third-party agents.
Waigel made the same point in an October 2011 surveillance report, alerting Siemens to the risk resellers run in “relationships with current and former government officials”. He added, “An organization must take steps to continuously monitor its relationships with third parties to detect red flags of corruption and terminate relationships that expose the organization to liability.
A 34-page “special review” of the company’s system for examining potential partners completed in January 2010, called the Business Partner Tool (BPT), showed that in November 2009, Siemens assembled a team to examine how the company checked these third parties, referred to as import / export companies in the documents.
When the team interviewed Liu in December, Liu said he was concerned that Siemens would allow certain business partners to bypass control through the BPT, thereby allowing what were, by Siemens’ own definition, entities. “High risk” from carrying out business activities. in China without due diligence. It appeared that the review team listened to Liu. The review said a 2008 decision to “exclude (import / export companies) related to sales and tendering from BPT approval” should be reconsidered.
The team even noted other red flags that it believes should intensify control of import / export companies. One of those red flags was the fact that Chinese hospitals chose a “trusted partner” to purchase the equipment from and assigned that trusted partner to a respective Siemens unit. A second indicator was that some import / export companies used by large hospitals were in fact former purchasing departments of these hospitals.
In an emailed statement, Siemens did not directly address this review, but insisted its compliance system was “adequately designed” and highlighted Waigel’s positive assessment of the company at the end of its surveillance.
Otto Geiss, a former head of compliance at various German companies and a board member of the European Business Ethics Network in Germany (DNWE), said the company was turning a blind eye to a questionable system.
“Of course, if the hospital has influence over who imports the product, I would say right away that the bribes are paid,” Geiss said. “What interest could a hospital have in Mr. X or MY importing?” This means they have influence over who gets the business.
Additionally, five months later, a memorandum issued by Siemens compliance officials reinforced the 2008 decision to ignore these warning signs. The June 2010 memo, sent to Liu and others, said three of the four different ways Siemens works with import / export companies in China could be exempt from this scrutiny.
“Why should I find a methodology for the red flags and not apply it then?” Geiss asked. He noted that Siemens has been widely praised for developing its IT-based business partnership tool to help eliminate corruption as part of the comprehensive compliance infrastructure it built after the 2008 scandal. “Why should I make a rule, then define all the exceptions, then say only the exceptions apply?” ” He asked.
The June 2010 note also included a rather alarming footnote on one of the business models. Under what has been called “Model B”, in which the import / export company is viewed as an agent of the hospital rather than Siemens, officers acknowledged that “it is not clear to Siemens whether the (import / export company) signs another contract with the end customer. The footnote admits: “We cannot rule out the possibility that the (import / export company) and the end customer will abuse the structure and make other transactions under the table.”
In other words, the note expressly recognized the risk of corruption, but did not explain how to prevent it or how to address it if it did occur.
Siemens fired Liu in 2010, after drawing attention to the breaches of due diligence. A spokesperson for Siemens said Liu left the company on “a mutual termination agreement,” while Klaus Moosmayer, then Siemens’ chief compliance officer, said at the time that Liu was fired at the time. suite of “performance issues”.
In November 2010, after Liu learned of his dismissal, he emailed Waigel and the company’s compliance department, detailing what he called numerous compliance failures.
How Waigel handled Liu’s concerns in his surveillance reports, or even whether he read Liu’s email, is unknown, thanks to the secrecy he and Siemens insisted on to fight their public release. Nonetheless, Waigel’s year two work plan stated that “Siemens. . . strives to implement all 114 recommendations (from its initial report) in a timely manner. In October 2011, after three years of evaluating Siemens’ compliance policy and procedures, Waigel concluded that the German company had “fully implemented all of its recommendations from the first year.”
Literally Waigel was right. The Observer had recommended a “review” of the company’s practices regarding resellers, which Siemens had indeed conducted. However, the spirit and intention behind the recommendation – to eliminate corrupt practices – seems to have been largely circumvented in favor of a more passive approach, consisting of only reacting after corrupt actors have been identified by external parties – such as Chinese courts.
Faced with the apparent inaction of Siemens, the problem persisted. According to a recently released Chinese court verdict, in the same year that Waigel presented Siemens with a certificate of good health, a Siemens business manager offered to pay the president of an Anhui district hospital $ 2 million. renminbi ($ 300,000) to ensure that Siemens products have won auction. The president of the hospital who made the confession was found guilty of accepting bribes from 2004 to 2017.
Two years after Waigel’s oversight of Siemens ended, Siemens China top sales manager, like Liu before him, spoke out against corruption among third-party resellers. In a 2013 email to dozens of senior executives at Siemens China, Director Cao Yong Sheng pointed to a “huge gap between bids and contracts” and asked, “Where is the gap going? ”
Sheng, fired for his own alleged corruption, argued that Siemens was well aware that middlemen overcharged the equipment, increasing the cost of bribes paid to hospital officials. “It made us very uncomfortable and so worried,” he wrote.
This article is an abridged version of a survey conducted by 100Reporters, a nonprofit investigative news organization, in partnership with the McGraw Center for Business Journalism at the Craig Newmark Graduate School of Journalism at the City University of New York. The full investigation can be found at 100R.org.